Three ways to recognize a timber investment scam

Loading logs from the Arimae Community Forestry project

Loading logs from the Arimae Community Forestry project

There are a few things to watch out for when evaluating a direct timber investment.

Last week we read the news that Brazilian-based Global Forestry Investments was exposed for allegedly defrauding investors. 

The signs of fraud are evident: the promise of a "guaranteed" payout of 10% annually, with potential returns moving towards 20% at the later end of the plantation life cycle.

This type of scam isn't new. We've seen other operations like Tropical American Tree Farms (TAFT) take investors for a ride, and in the process damage the reputation for all timber investments in Latin America.

While these timber investment companies are clearly in the wrong, investors also need to do their homework before investing. Here are a few things to look out for:

1. A high initial investment amount

This was the case Global Forestry Investments. A £5,000 investment (around $7,500) got you a tenth of a hectare, or 110 trees. That means a full hectare would cost you $75,000, which is 5x or more what it should cost--and you’re not even getting land as part of the deal. This suggests that there were a significant amount of “marketing” and other administrative expenses that were baked into the cost, making it nearly impossible to generate such a high return.

2. Timber pricing projections based on timber from primary forests

TAFT projected their teak values based on primary forest teak, fetching $2,000/m3. The latest ITTO report shows teak log prices from Costa Rica (where the investment was based) ranging between $414-840. Costa Rica’s Oficina Nacional Forestal also has domestic pricing information for a number of species; something our Panamanian forestry industry could really use.

3. Inflated projections for timber pricing growth

TAFT also projected annual timber price increases of 6%, based on a cherry picked time range. Wood markets fluctuate, so you need to understand what the long term trends are. It’s also worth investigating what kind of wood product the forestry company plans to sell (raw logs, blocks, sawn wood) and if they plan to sell it domestically or export.

If you note any of these in the investment you're looking at, be on guard. They probably won't achieve their targeted returns and, at the worst you might lose your shirt.

What's reasonable?

Returns of 5-10% from timber are a reasonable expectation (from a complete timber cycle), especially for new operations (scale is important), and when land is not included as part of the investment. Any investment promoter offering a higher IRR should have agriculture revenue supplementing the project, or have the ability to repackage early timber plantation and resell to a new investor, providing early investors liquidity.

There will always be scams, in the timber investment business and beyond. As we’ve said before, a good rule of thumb is that if an investment seems too good to be true, then it probably is.

We hope to bring attention of the issue and help those interested in this important space to do their due diligence. If you have any experience with timber investment scams, or any questions, comment below and we’ll reply.

Costa Rican officials also battling cocobolo logging

An official points out heartwood of an illegally felled cocobolo tree. Photo courtesy of the Diario Extra.

An official points out heartwood of an illegally felled cocobolo tree. Photo courtesy of the Diario Extra.

In Panama, cocobolo fever (el fiebre de cocobolo) is rising, as the dry season moves into its second month. But it's not limited to Panama. In Costa Rica, officials are battling illegal harvesting of the precious wood, facing a "mafia" that is becoming ever more sophisticated in how they smuggle the wood to market. Here's the full story (Spanish).

According to the latest International Tropical Timber Organization report, a cubic meter of cocobolo (dalbergia retusa), in one port at least, is selling for nearly $8,500. As a point of reference, a cubic meter of teak is going for around $1280.

Cocobolo doesn't tend to develop heartwood until it's more mature, so ours should be safe for now. But come year 20, we might need a small army to fend off opportunistic loggers.

Read more about the cocobolo frenzy in our previous blogs here, here, here, and here.

Photos from January 2015 trip

Last month we took a group of visitors down to Panama to visit our forestry projects, meet local partner communities, and explore the incredible biodiversity in the Darien. Here are some photos from the trip.

ANAM Steps Up to the Deforestation Challenge

Logging of an espave tree in the Darien province

Logging of an espave tree in the Darien province

We were heartened to recently read that under the new leader of the Ministry of Environment (ANAM), there will be an intensive new effort to control illegal logging in the Darien this dry season. The plan was announced last week.

During the last years of the Martinelli (previous) administration, there were a significant number of conflicts, and some deaths, in the Darien/East Panama region related to logging. ANAM as an institution saw its minimal resources cut further, which made it virtually impossible for them to regulate the logging in the region.

With the new plan, the ANAM regional team is being reinforced with 30 staffers from other regions. They will be stationed at the various checkpoints in the eastern side of Panama, helping to verify that wood leaving the region is legal and certified to be transported. The checkpoints will run 24-hours.

According to ANAM, they did significant public outreach to the logging community to consult with them about the new plan, while also educating them about the actual regulations. While the status quo was probably preferable to many of the loggers, this new enforcement will hopefully crimp the illegal cutting and extraction of timber in Darien, a province considered a biodiversity hotspot by Conservation International.

We spoke with the director of ANAM for the region and he mentioned that probably more than 50% of the timber harvested in years past was done illegally. That was not only bad for the forests in Darien, but bad for ANAM itself because of the lost revenues. Their goal now is to reduce the amount of illegal logging to 25% of the timber harvested. We wish them luck.

Raleo in Arimae

Over the past few weeks we have been working with the community of Arimae to do a raleo, or thinning, of their community-owned native timber. The community has about 15 hectares of native species trees, including mahogany, spanish cedar, and spanish oak that hadn't been thinned or properly maintained. Through an offtake agreement with a local indigenous-operated sawmill, we're helping the community sell some of the commercially viable trees. As you can see, this is a very manual process--no fancy machinery, just hard work.